Lessons from an airport parking scam

Airport car parking is a rip off, but there’s a lesson here for investors looking to engineer profit.

Is there any land in the country that works as hard as an airport car park?

The ACCC just release a report into the nations airports. They found that for every dollar of revenue airport carparks earnt, around 70 cents was pure profit.

The profit margins ranged from 64% in Perth to 73% in Melbourne.

Nice.

To put that in perspective, a lot of small businesses would be happy with a profit margin of 20%. If they’re getting 20%, they’re doing well.

So 70% is sweet.

To try and torture the numbers into something property investors would understand, the ACCC say that the return on assets for the whole airport ranges from 6.2% in Brisbane to 12.4% in Sydney. We can think of that like yield.

But how much of an airports value is in the car park? They’re pretty basic structures with a relatively small foot print. A quarter would be conservative, I’d reckon. Probably less.

So if we say a quarter, multiple our yields by four, bump it up a little to reflect different profit margins, and we’re looking at yields of around 40%, at a rough guess.

Show me how you can lose money with yields of 40%. It is very, very sweet indeed.

How did it get so sweet?

As ACCC chair Rod Sims admits, “The high profit margins of the airports indicate that they do not face much competitive pressure.”

No kidding. Airports have the whole thing totally stitched up.

Airports and airport car parking are monopoly businesses. They’re the only show in town.

And the business decisions facing a monopoly business are totally different to an ordinary business.

For an ordinary business you’ve got to price to the market. You can only charge what your competitors will let you get away with. If your price is too high, your customers will walk and shop with somebody else.

But a monopoly business doesn’t have competitors.

So when they’re thinking about a price, their only reference is profit. It becomes an optimisation problem. Different prices result in different quantities of sales. So the question is what combination of price and sales maximises profit.

I guess for airports they also need to be careful not to set a price so high that it sets of rebellious behaviour – parking on the median strips, or endless laps of the car park, or assaulting the poor security guards!

I guess they’re optimising profits and whatever they can get away with.

The result is 70% profit margins.

(My friend just came back from San Francisco and said parking there is $2 for 20mins…)

Anyway, I’m not writing this blog to have a whinge about airport carparks (ok, maybe a little). But there’s an important principal here for anyone in business, and especially for anyone in the business of property investing.

Monopoly power makes profit.

A lot of business activity goes toward creating monopoly power. Think about marketing. Some marketing is about getting the word out. But a lot of it is about creating monopoly power.

Think about Levi jeans (or whatever kids are wearing these days). Basically, they’re just another jeans company. But a lot of marketing energy goes into giving the brand a certain buzz that no other jeans company has.

That buzz makes Levi jeans unique in the consumer’s mind. The more unique, the more monopoly power Levis has, the more they can charge consumers before they’ll jump ships.

Ultimately, you want to create the perception (if not the reality) that what you’re selling is in short supply.

The more you can do that, the more freedom you have to set your own prices, the more profit you can make.

Monopoly power makes profit.

This is all Economics 101 (or maybe 202). And it’s always something I’m thinking about when I’m sizing up a deal.

Of course a lot of the monopoly power in property is given. There’s only so much waterfront property in Sydney. You can’t make more of it.

But there are ways you can create it. Maybe you find a university that doesn’t have a lot of share accommodation in the immediate vicinity. You could set up a dorm type scenario. Your monopoly power would allow you to charge decent rents and earn a decent return.

Or maybe you find the only block in a suburb with enough room for a pool. That gives you the opportunity to create a unique selling point, and earn better than average returns.

The reverse is true too. One of the reasons I’m nervous about all these off-the-plan apartments coming on to the market is that you have almost zero monopoly power when it comes time to sell.

If you’re in a building with a hundred other apartments, all exactly the same, it’s very hard to engineer any difference. And that means you’ve got very little pricing power. You’ve got to take whatever the market is giving you.
And markets can be misers sometimes.

Anyway, it’s a good guide, especially when thinking about renovations. How can I make this property unique?

I choose not to park at Wilson’s carparks. They suck with their overpriced offshore incorporated operations. At airports it’s disappointing when you have to pay $5 just one minute after the free parking period ends (10 minutes). Potentially $20/h per car bay revenue during quick turnovers sounds like a great monopoly business, mindful of the fact it may take up to 5 minutes to walk back to your car.

I think Jon only used this as an example alerting us in how to look at prospective properties to buy, to maximise our success in property. Having said that, I’m on the fringe of that airport parking business and if you have to travel from Townsville airport (which has just put their rates up even more!!), consider using Montys Car Parking. They’re just under 5 minutes from the airport with very reasonable rates and provide transport to and from for free 24/7.

it’s similar to the ‘put a gun in someone’s face and demand their money’ model, except that govt. endorses it,

anti monopoly laws should require a minimum of 2 operators, with almost double maximum capacity, current price displayed on entry, so drivers can select cheapest,

or, it’s a good model as to how public facilities should be privatised, govt. / the people, should own car park, and the operation should be up for public tender, in small blocks, so that real time competition can exist

That’s why when buying apartments you need key points of difference which will set your property apart from the others on offer. These are quite hard to find but are there for savvy investors……extra large terraces, better amenities, bigger areas. You need to be careful and see value where others cannot.

I REFUSE to park at any ACE PARKING. They have a parking service also at the airport. They were issuing people “infringement notices” for a few minutes over – having $88 “fines” and then getting debt collectors onto people. The real damages when you think about a small over time stay is neglible compared with $88 “fine”. I am talking about parking lots next to hospitals etc where you would expect delays even of a few minutes from people but no need to get DC’s onto people etc for what is a small hourly fee. I read this at http://carsaust.com/ace-car-parking-car-park-fines-melbourne/